Table of Contents
- Volkswagen or Hoaxwagen?
- Key problems
- How did they do it?
- Why do the problems exist?
- Impact on the organization
- Who is responsible?
- Actions taken by the organization
Volkswagen or Hoaxwagen?
Scandals in the auto industry aren’t new. One of the biggest scandals in the industry was encountered in 2015 when Volkswagen (VW) was charged for employing a defeat device in their 2009-2015 models. Reporting emissions to be lower than they actually are came to light in 2014, when the International Council on Clean Transportation (ICCT) reported discrepancies between European and US models of vehicles. Volkswagen’s “Dieselgate” also called as “Emissionsgate” scandal was one of the most audacious corporate frauds in history (Source: Wikipedia). VW’s unethical practices were going on for a long time and it was only after the involvement of Environmental Protection Agency (EPA) that VW had to face some serious charges. EPA had issued a notice of violation of the Clean Air Act to the Volkswagen Group.
Installation of the “Defeat Device”
What has VW done?
Volkswagen was cheating on the emission tests in the USA by making the emissions appear far less than they actually are with the help of a ‘Defeat device.’ It was discovered that the cars emitted 40 times more toxic fumes than permitted by the US laws.
How did they do it?
Volkswagen had installed the defeat device to escape from the stringent laws. This device is not a physical device but a program in the engine software that helps the car recognize whether or not it is under test conditions. The software installed was able to sense when the testing was in progress on the basis of the position of the steering wheel, the speed of the car, how long did the engine operate and the barometric pressure. ‘Clean diesel’ engines were programmed to reduce emissions when operating under such controlled laboratory conditions. The vehicle’s central computer, after detecting the test conditions would put the vehicle in a type of safety mode through techniques such as adjusting air-fuel ratios and exhaust flows. The Volkswagen emissions scandal explained. This meant that the engine ran below normal power and performance and thus switched out of this test mode to emit 10 to 40 times the legal amount while on road. According to reports, Volkswagen deployed this defeat device in about 11 million cars worldwide. The magnitude of the VW scandal was so immense that it raised high awareness resulting in investigations into other diesel emissions scandals.
Consumer fraud and false advertising.
Suits were filed against Volkswagen Group of America by the Federal Trade Commission (FTC) as VW tried to deceive its consumers by selling diesel cars based on false claims about low emissions, nitrogen oxides reductions, emissions compliance, eco-consciousness, and comparative resale value.
The suit strived to seek compensation for consumers who were deceived by the automaker’s ‘Clean Diesel’ advertising. Due to such deceptive claims by the company, the consumers were not able to acquire the benefits of an environmentally friendly car they thought they were purchasing. VW’s behavior was not unexpected. The organization has a background of scandals and a history of evading laws.
Why do the problems exist?
The Volkswagen Culture
A company’s culture is very important in determining its success. Culture is a powerful force that causes individuals to make decisions that aren’t in their companies’ best interests. When employees feel that the company doesn’t allow honest internal communication, businesses can turn into a huge mess. Although VW’s management may not have directly asked the employees to participate in the scandal, the extreme pressure on the employees’ by the management to perform may have led to the unethical behavior. For example, Ferdinand Piëch, Chairman and CEO of VW, was known for his demanding management style which could lead to his subordinates taking extreme measures. Piëch’s reputation was ruthless. As the CEO, he had ousted three Audi CEOs. The one who finally lived up to his expectations was Martin Winterkorn. Winterkorn was also a demanding boss who didn’t like failure. According to critics, the pressure on managers at Volkswagen was so much that it might have lead to the carmaker’s crisis. Taking into consideration Piëch and Winterkorn’s behavior, it’s not difficult to understand why the employees might have withheld certain information about the infamous scandal for a long time. “There was a corrupt corporate culture at Volkswagen. It was not a culture marked by honesty and openness. The executives responsible for the affair obviously were not concerned that they would be putting their company in a precarious position” said Larry Thompson, the monitor appointed by the US Justice Department.
Individuals are easily held accountable for their performance in a performance culture. A corporate culture that only focuses on performance metrics, without letting its staff express basic human concerns, is an unsafe workplace. In order to keep one safe, individuals will not be motivated to speak up or to refuse to follow orders that could result in greater harm. Such a cultural setting has a high risk of promoting fraud and cheating. Several experts believe that the most probable explanation-for why VW’s engineers were willing to commit crimes and defraud the public-was to save their jobs. An old employee of Volkswagen told the New York Times, “The Company is fuelled by intimidation at every level, which creates a borderline, or sometimes over the borderline, unethical culture.”
Volkswagen is a for-profit business. The introduction of the ‘money’ factor can change the ethical temperature of a culture. Just the thought of money may lead to moral muteness in individuals. This may be one of the various reasons as to why no one reported the unethical behavior for almost 7 years.
Impact on the organization
- Impact on the Workforce: After the scandal became public, sales of Volkswagen were drastically affected. In order to cope with this crisis, VW announced that bonus of chief management will be reduced substantially. The company had decided to let go around 30,000 of its hard working employees as it was trying to restructure itself to help recover from the diesel emissions scandal. A great number of employees were concerned about their job security and were dissatisfied to encounter with customers suspending them whether they were aware of company’s scandal or not.
- The reputation of Volkswagen was drastically ruined due to one of the severest challenges in its nearly 80-year history.
- Drop in Volkswagen Sale. The fact that Volkswagen diesel scandal has brought about vital effects on Volkswagen group brands, a fall in the sales of Volkswagen vehicles can be seen. VW’s ruined reputation has affected its customer loyalty; costumers switching from Volkswagen to its competitors leading to a noticeable drop in sales. The sales of VW cars suffered a total net loss of $1.84 billion within a short period of time. VW’s stocks were sold off immediately which resulted in a loss of 16.9 Billion.
- Problems for Volkswagen Dealers. Although, Volkswagen had initiated a program that would offer specific amount of money in form of sales bonus, incentives, or subsidy injected to dealership network struggling with lower sales and profit as the sale of Volkswagen diesel cars was banned the dealers suffered a great deal.
- Drop in Volkswagen Shares. Unethical practice of Volkswagen led to a dramatic drop in their share value. As soon as the Volkswagen scandal was revealed, the shares of the company dropped tremendously by almost one third. Thus, the emission scandal wiped billion dollars from Volkswagen value.
- People’s Health Concerns. Due to the excess amounts of nitrogen oxide that was released in the air, a lot of environmental and health concerns could be seen. Nitrogen oxide leads to smog, acid rain, water quality deterioration, childhood asthma, respiratory ailments, and premature death, according to the Environmental Protection Agency. The fumes can cause inflammation of the airways and worsen breathing for anyone. It was also found that the excess amount of nitrogen oxide in the air due to the VW’s scandal could lead to more than 1000 premature deaths across the globe.
- Economical Impact. Before the scandal was acknowledged, Volkswagen was the second largest in automobile industry. The scandal was followed by large amounts of fines, compensation, restitution, cost of buying back the cars and attorneys’ fees. VW had to deal with many legal and public relations offices as well as with international regulations around the globe.
Who is responsible?
Volkswagen’s emission scandal took place on a tremendous scale and only the CEO or a small group of engineers cannot be held accountable for the same. There may be various reasons as to why some people were engaged in such fraudulent activities one of them being the toxic culture at Volkswagen. The engineers developed the illegal software, because it wasn’t possible for the diesel models to pass the difficult US emissions tests alone. Instead of developing their technology, they preferred to use unethical means. Winterkorn, the former CEO of VW, claims that he was not aware of the wrongdoings in the company as the scandal was not a corporate decision. He assumes that one of the reasons this unethical act took place is because of the mindset in some departments of the company which fails to comply the rules. The external investigator of Volkswagen later revealed that around 50 members confessed knowing about the unethical activities. It was also learned that although some Volkswagen engineers and technicians informed their supervisors about emission rigging activities in the year 2011, supervisors ignored the alert. Till now, the Justice system of USA has successfully prosecuted former engineer James Liang and compliance officer Oliver Schmidt for being involved in the scandal.
Actions taken by the organization
Initially, Volkswagen continued to deny the discrepancies stating that they were mere technical glitches. It was only after they were shown conflicting evidence that they acknowledged the truth. The company made sure that apology statements were made public and various company officials including 11 top executives and 2 engineers were suspended. Martin Winterkorn, the then CEO had to resign from his post. VW also appointed a law firm called Jones Day, for the investigation. A team of 450 people was appointed by the company to investigate the scandal. The law firm Jones Day interviewed 87 members of staff, seized 1,500 devices belonging to 400 employees and trawled through data equivalent to 50m books (Ruddick, G. (2015). VW admits emissions scandal was caused by ‘whole chain’ of failures. the Guardian.) In order to overcome the crisis caused by the dieselgate scandal, VW took an initial step by launching a website to help the owners with information about the problem. They also stopped advertising their latest TDI models. A new mind-set that would appreciate criticism was promised by the board. This, indeed, implies that the culture Winterkorn administered was a toxic one. To achieve a cultural change, VW has taken up some necessary steps. One of the first things they did was splitting engine development and vehicle approval into two separate divisions. Besides this, the company has introduced new rules, changed the Code of Conduct, and also initiated an integrity program along with continuous staff training sessions. Another action taken by the company in order to overcome this major issue involves fixing of both the software and the hardware in the specific variants of the car. VW’s technicians were instructed to disable the illegal software and upload a new one. This will direct the emission controls to function effectively. The company also promised to replace the catalyst that scrubs smog-causing nitrogen oxide from the vehicles’ exhaust. VW had to spend around $30 billion until now to cover the cost of the global scandal, which includes a total of 11 million vehicles worldwide. Volkswagen is now focusing on investing into hybrid and electric vehicles and plans to spend more than $60 billion on battery cells as it wishes to electrify all its 300 variants by 2030. Volkswagen’s diesel scandal costs hit $30 billion.
Pros: The Company has made a good decision of bringing back the cars and making the required changes in them. This would definitely help in improving the brand image of the company in the world market. Volkswagen has bought back hundreds of thousands of its diesel cars which would be fixed and returned to customers, resold or destroyed. The investment of Volkswagen in electric cars will prove to be beneficial for the environment.
Cons: Bringing back millions of cars and replacing them is not an easy task. It requires a lot of capital, skilled management and tremendous effort. Although the company has started recalling their diesel cars, one will have to wait for a long time to get his/her car repaired or get compensated for it. Such solutions are difficult to apply on a large scale.
Proposed Solution: VW is a renowned company with plenty of resources. As it is said “Precaution is better than cure”, a team of experienced administrators should be appointed who make sure no wrongdoings happen at the company than having a team of investigators later. Ethical culture should be imbibed in each and every individual of the company-right from the top executives to everyone down the hierarchy- so that no such incident is ever repeated. There must be strict laws in the company for the same. For example: As TATA’s are known for their ethics, a company along with making profits should strive to achieve this goal.
VW has taken up various measures and has worked hard to improve its reputation in the market by correcting the issues. Engineering teams should be careful about the task in hand and there must be appropriate supervision. Ignorance or negligence can lead to a lot of issues. Here is an example of how Volkswagen can regain its lost respect: After Brexit, the UK production plants hit recession at the highest and this endangered the European sales of Honda as most plants were situated in UK. In a certain quarter, Honda hit its lowest possible turnover ever. To overcome this, Honda conducted campaigns to know about the prevalent situation which helped it to overcome the crisis. VW can also improve its lost reputation by launching such campaigns and conducting surveys. According to the data collected, it can take various steps to gain back its consumer loyalty and induce feelings of trust again. As for any profit-making business, support of its consumers is the most important thing.
Thus, all in all Volkswagen’s scandal had created hassles for all the individuals’ affiliated with it leading to disastrous consequences. Now that the dangerous consequences such as law suits, fines, tainted reputation, loss of trust, loss in profits etc are known, other companies must rethink before getting involved in any such scandals.